Assignment

Understanding the Trading Term: Assignment

The term Assignment in the world of trading refers to the process when an option writer (the seller) is obligated to sell or buy shares at the predefined strike price. This generally happens when the person holding the option exercises it. The rights of an option are transferred from the holder to the option's writer. It's essemtial to understand the concept of assignment as it bears significant potential risks and rewards within trading.

When does assignment occur?

An Assignment takes place when an option holder decides to exercise their rights. Upon exercising a call option, the option writer will have to sell shares at the strike price. When a put option is exercised, the scenario differs. The writer will have to buy shares from the option holder at the agreed strike price.

The role of expiration in assignment

The option's expiry date plays a crucial role in an Assignment. As a rule of thumb, assignments often occur closer to the expiration date. However, it's not a guarantee since an assignment can take place anytime during the option contract.

Facing an assignment

In the trading world, facing an unexpected Assignment isn't unheard of. To handle such situations, you need to be well-prepared. Deepen your knowledge around trading concepts, strategies, and especially regarding options. Define your risk tolerance and take actions that align with it. Doing so reduces chances of making rushed decisions that could potentially cause significant losses.

Is assignment risk avoidable?

Largely, yes. The best way to avoid Assignment risk is by not writing options. But if you choose to do so, be well-prepared about potential risks. Consider adopting a strategy where options are bought back before they are in a position to be exercised, therefore removing the risk of assignment.

In conclusion, understanding the concept of Assignment is vital for anyone involved in trading, specifically those dealing with options. It helps in better risk management, decision making, and ultimately, aids successful trading.